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With the Federal Reserve recently signaling that it is willing to start lowering interest rates, many consumers are turning to certificates of deposit (CDs) as a way to maintain today’s high interest rates for an extended period of time. That’s not a bad strategy. Short-term CD rates have already begun to fall, and it remains to be seen how much further they will fall if the Fed provides a clearer path forward at its next meeting.
Of course, CDs come with penalties, so you need to develop a strategy to maximize your profits. With that in mind, let’s take a look at three ways to take advantage of today’s best CD rates without your plans backfiring.
1. Get a CD without penalty
Penalty-free CDs allow you to cancel your CD contract early without incurring penalties or fees. This can be a smart option for people who don’t have much savings but want to secure a high interest rate while they can.
Early withdrawal penalties for CDs can be severe. In many cases, the penalty is equal to the period of interest, whether earned or not. For example, a 12-month CD may have a withdrawal penalty equal to 90 days of interest. If you withdraw after 60 days, you’ll still pay 90 days of interest and incur a loss.
Historically, no-penalty CDs had such low APYs that they weren’t worth the investment. However, at today’s high rates, you can find many non-penalty CDs that are comparable to penalized CDs. Check out the financial platform Raisin for a great example of this. Currently, the highest penalty-free CD payment is 5.40%. For comparison, the highest regular CD payout rate is only slightly higher at 5.51%.
2. Build your CD ladder
A non-penalty CD has a major weakness. Most CDs are short-term, such as five months, and are not suitable for long-term investments. If you want the flexibility of CDs without the penalty, but want to lock in today’s high rates for longer, you may be better off building a CD ladder.
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With a CD ladder, you divide your funds into equal lump sums and invest them in CDs over staggered periods. For example, if you have $25,000 in savings, you can invest that money as follows:
This is different from, say, investing $25,000 in a two-year CD. In the two scenarios, the interest you earn may be similar, but with a two-year CD you have to wait 24 months before you can access your money, whereas with this particular CD ladder you have to wait 6 or 6 months before withdrawing. It should not take more than a month. Some of your savings. This gives you peace of mind while also providing a plan B in case an unexpected expense occurs.
3. Get a brokered CD
A brokered CD is a type of CD contract that is only available through a brokered account. In this case, the broker buys his CDs in bulk from a CD provider, such as a bank, rather than his CD publisher, and sells them to his customers. Examples of mediated CDs include:
Brokered CDs typically do not allow early withdrawals, even if you agree to pay a penalty. Instead, you should sell CDs on the secondary market, similar to stocks or his ETFs. This includes finding a buyer who will take the CD.
As with any investment, you may incur losses, especially if the CD’s rate increases after you purchase it. However, it looks like rates will drop in the near future, so buying the highest-value CDs now and selling them later can yield significant profits. There’s no guarantee that you’ll make money, but it’s certainly an interesting strategy to try if you’re willing to take a risk.
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